Are Liquidated Damages Waived if Not Imposed at First Instance?

Although it is vital to go through any contract thoroughly before signing it, at times people might miss out on some important clauses that they wish to add. However, doing so post signing the agreement can be quite complicated and tedious, while not being possible in several instances as well.

You might also come across instances where people might choose to neglect the clauses of the contract after making insensible excuses. Such individuals basically believe that in cases where the validity of the question comes down to some time limit, everything shall become null and void once the time limit runs out. However, the question that arises is – is this really true? As such, people also raise concerns over whether liquidated damages shall be waived if it is not imposed in the first instance.

Definition of Liquidated Damages

Under Section 74 of the Indian Contract Act, in case a contract is broken:

• If an amount has been named in the contract as an amount that shall be paid in case of a breach or if there are any other stipulations by the way of penalties, the party complaining shall be entitled to receive compensation not exceeding the mentioned amount or, as the case may be, the stipulated penalty.
• This is applicable whether or not actual damage or loss is proved to have been caused by the party who has broken the contract.

What are Liquidated Damages?

Liquidated damages are clauses present in some legal contracts as an estimate of otherwise intangible or hard-to-define losses to one of the parties. It provides for the payment of a certain amount in case of a breach of contract.

• Liquidated damages aim to fairly represent losses in instances where calculating the actual damage might not be possible or considered a tedious task to deal with. These types of damages generally aim to be fair rather than punitive.
• Such damages may be stated in contract clauses to deal with instances where a party faces loss due to assets that do not have a direct monetary correlation. For example, if any party involved in the contract leaks confidential details related to supply chain pricing, they shall be liable to pay the penalty under liquidated damages.

The liquidated damages can be agreed upon by both parties as long as the amount payable reflects the anticipated or actual losses caused by the breach of contract, and takes into account the difficulty of proving such a loss.

Note: Unreasonably high liquidated damages cannot be enforced, especially if the amount exceeds the loss actually caused by the breach.

Section 55 of the Indian Contract Act, 1872 clearly states that contracts where time is the crucial factor, voidability of such a contract depends upon whether the obligations are completed by the parties within the decided time limit.

In addition to this, Para 1 of Section 55 states that in cases where time is not of the essence, the contract shall not become voidable. Even then, the party facing breach of contract shall be eligible to receive damages caused as a result of the breach.

Perspective of the Judiciary on Liquidated Damages

Recently, the Supreme Court of India in the case of Welspun Specialty Solutions vs. ONGC held that simply because time was not of the essence, the liquidated damages clause of the contract doesn’t become inoperable.

• Various construction contracts or contracts of significantly large magnitude often contain a provision for imposition of liquidated damages by the employer in case of delayed performance.

The Supreme Court added that if the arbitrator’s reasoning was accepted, the liquidated damages clause in contracts shall be present but lose all its value. The main goal of including a liquidated damages clause in contracts is to limit the total amount of damages.

• A liquidated damages clause does not rely on the fact that time was the essence of the contract or not. If the arbitrator’s reasonings were accepted, nothing would prevent the aggrieved party from lodging a claim for damages in excess of the liquidated damages provided in the contract, based on the fact that the actual damages are far more than liquidated damages and, considering time was of the essence and it has passed, the liquidated damages clause is not practicable.

The arbitrator’s findings on the waiver did not adhere to the express provision of the contract. Clauses 9(ii) and 9(iii) reiterated that accepting delayed supplies would be without prejudice to Failure and Termination Clause, which includes the provision of the liquidated damages.

According to the Supreme Court, the line ‘unless the purchaser clearly waives their right to recover such damages, in writing, after getting the approval of the competent authority’ under clause 9(iii) was of utmost importance.

The Court stated that the arbitrator seems to have entirely ignored this clause. Simply because liquidation damages were not imposed while granting one or two extensions, it does not deem that the liquidation damages clause was waived entirely. It must be noted that under the liquidation damages clause, the aggrieved party is not entitled to ignore the actual loss and receive the full liquidated damages amount. Thus, in cases where actual losses are provable, the aggrieved party shall be eligible to recover the actual losses only, while it does not mean that the liquidation damages clause loses its existence entirely.

Keeping the provisions of Section 55 of the Contract Act in mind, it can be said that if liquidated damages were not imposed while granting the first two extensions, damages for the same could be claimed later.

As mentioned above, such a right is statutorily protected and there cannot be any question to waiver it.

Conclusion

As per the legal provisions that govern liquidated damages and the Supreme Court’s perspective on waiver of such damages, liquidated damages cannot be deemed to be waived if they weren’t imposed the first time. It should be understood that such damages can be claimed at a later date, unless the receiving party waives it off specifically in writing.